PORTFOLIO AND INVESTMENT
ANALYSIS
1
TABLE OF CONTENTS
Contents
COURSE OUTLINE: .................................................................... Error! Bookmark not
defined.
1.1 Introduction........................................................................................................................................ 6
1.2 Lecture objectives .............................................................................................................................. 6
1.3 Lecture outline ................................................................................................................................... 6
1.3.1 Portfolio .......................................................................................................................................... 6
1.3.2 Investment concepts ....................................................................................................................... 7
1.3.2.1 Investing ...................................................................................................................................... 7
1.3.2.2 Types of investing........................................................................................................................ 8
1.3.2.3 Types of investors ........................................................................................................................ 8
2.0 LECTURE 2: INVESTMENT ENVIRONMENT AND INVESTMENT ..................................... 10
MANAGEMENT PROCESS ................................................................................................................. 10
2.1 Introduction...................................................................................................................................... 10
2.2 Lecture objectives ............................................................................................................................ 10
2.3 Lecture outline ................................................................................................................................. 10
2.3.1 Investment environment/climate .................................................................................................. 10
2.3.2 Types of investment vehicles/Avenues ........................................................................................ 11
2.3.3 Investment attributes ..................................................................................................................... 12
2.3.4 Investment decision making ........................................................................................................ 14
2.3.5 Investment management process ................................................................................................. 16
, PORTFOLIO AND INVESTMENT ANALYSIS
2.3 End of lecture activities ................................................................................................................... 19
2.4 Summary .......................................................................................................................................... 19
3.0 LECTURE 3: FINANCIAL MARKETS......................................................................................... 20
3.1 Introduction...................................................................................................................................... 20
3.2 Lecture objectives ............................................................................................................................ 20
3.3 Lecture outline ................................................................................................................................. 20
3.3.1 Economic functions of a financial market ..................................................................................... 20
3.3.2 Classifications of financial markets ............................................................................................... 21
3.3.3 Efficient market hypothesis (EMH) .............................................................................................. 23
3.4 End of lecture activities ................................................................................................................... 24
3.5 Summary .......................................................................................................................................... 25
4.0 LECTURE 4: PORTFOLIO THEORY ........................................................................................... 25
4.1 Introduction...................................................................................................................................... 25
4.2 Lecture objectives ............................................................................................................................ 25
4.3 Lecture outline ................................................................................................................................. 25
4.3.1 Business risk ................................................................................................................................. 26
4.3.2 Factors influencing the efficiency of a portfolio .......................................................................... 27
4.3.3 Principles of portfolio theory ........................................................................................................ 28
4.3.4 Limitations of portfolio theory ...................................................................................................... 29
4.4 End of lecture activities ................................................................................................................... 30
4.5 Summary .......................................................................................................................................... 30
5.0 LECTURE 5: QUANTITATIVE METHODS OF INVESTMENT ANALYSIS .......................... 30
5.1 Introduction...................................................................................................................................... 30
5.2 Lecture objectives ............................................................................................................................. 31
5.3 Lecture outline .................................................................................................................................. 31
5.3.1 Measures of individual investment return and risk....................................................................... 31
5.3.2 Measures of portfolio return and risk ........................................................................................... 31
3
, PORTFOLIO AND INVESTMENT ANALYSIS
5.4 End of lecture activity ...................................................................................................................... 42
5.5 Summary .......................................................................................................................................... 42
6.0 LECTURE 6: EFFICIENT SET AND CAPITAL MARKET LINE............................................... 43
6.1 Introduction....................................................................................................................................... 43
6.2 Lecture Objectives ........................................................................................................................... 43
6.3 Lecture outline .................................................................................................................................. 43
6.3.1 The Old school approach of designing a portfolio ........................................................................ 43
6.3.2 Portfolio separation theorem and the efficient frontier curve ........................................................ 43
6.3.3 Capital market line (CML) ............................................................................................................ 45
6.4 End of lecture activity ...................................................................................................................... 48
6.5 Summary ........................................................................................................................................... 50
7.0 LECTURE 7: THE CAPITAL ASSET PRICING MODEL (CAPM) ............................................ 50
7.1 Introduction....................................................................................................................................... 50
7.2 Lecture objectives ............................................................................................................................. 50
7.3 Lecture outline .................................................................................................................................. 51
7.3.1 Capital asset pricing model (CAPM)............................................................................................. 51
7.3.2 Assumptions of CAPM .................................................................................................................. 53
7.3.3 Applications of CAPM .................................................................................................................. 54
7.3.4 Applications of CAPM in investment decision making ................................................................ 56
7.3.5 Limitations of CAPM .................................................................................................................... 61
8.0 LECTURE 8: ARBITRAGE PRICING THEORY (APT) MODEL............................................... 63
8.1 Introduction....................................................................................................................................... 63
8.2 Lecture objectives ............................................................................................................................. 63
8.3 Lecture outline .................................................................................................................................. 63
8.3.1 Arbitrage pricing theory model ..................................................................................................... 64
8.3.2 Assumptions of APT Model .......................................................................................................... 64
4
, PORTFOLIO AND INVESTMENT ANALYSIS
8.3.3 Applications of APT Model........................................................................................................... 64
8.3.4 Limitations of APT model ............................................................................................................. 66
8.3.5 Differences between CAPM and APT model ................................................................................ 66
8.4 End of lecture activity ....................................................................................................................... 67
8.5 Summary ........................................................................................................................................... 67
9.0 LECTURE 9: MEASURES OF PORTFOLIO PERFORMANCE ................................................. 67
9.1 Introduction....................................................................................................................................... 67
9.2 Lecture objectives ............................................................................................................................. 67
9.3 Lecture outline .................................................................................................................................. 68
9.3.1 Treynors measure of portfolio performance (Tj) ........................................................................... 68
9.3.2 Sharpes measure of portfolio performance (Sj) ............................................................................. 69
9.3.3 Jensens measure of portfolio performance ( ) ............................................................................. 69
9.4 End of lecture activity ....................................................................................................................... 72
10.0 LECTURE 10: VALUATION OF FINANCIAL OPTIONS ........................................................ 73
10.1 Introduction..................................................................................................................................... 73
10.2 Lecture objectives ........................................................................................................................... 73
10.3 Lecture outline ................................................................................................................................ 73
10.3.1 Categories of financial options .................................................................................................... 74
10.3.2 Types of financial options ........................................................................................................... 74
10.3.3 Factors affecting call options ....................................................................................................... 76
10.3.4 Factors affecting put options ....................................................................................................... 76
10.3.5 Black and schools option valuation model .................................................................................. 76
10.3.6 Limitations of the black and schools option valuation model ..................................................... 79
10.4 End of lecture activity..................................................................................................................... 80
10.5 Summary ......................................................................................................................................... 80
5
ANALYSIS
1
TABLE OF CONTENTS
Contents
COURSE OUTLINE: .................................................................... Error! Bookmark not
defined.
1.1 Introduction........................................................................................................................................ 6
1.2 Lecture objectives .............................................................................................................................. 6
1.3 Lecture outline ................................................................................................................................... 6
1.3.1 Portfolio .......................................................................................................................................... 6
1.3.2 Investment concepts ....................................................................................................................... 7
1.3.2.1 Investing ...................................................................................................................................... 7
1.3.2.2 Types of investing........................................................................................................................ 8
1.3.2.3 Types of investors ........................................................................................................................ 8
2.0 LECTURE 2: INVESTMENT ENVIRONMENT AND INVESTMENT ..................................... 10
MANAGEMENT PROCESS ................................................................................................................. 10
2.1 Introduction...................................................................................................................................... 10
2.2 Lecture objectives ............................................................................................................................ 10
2.3 Lecture outline ................................................................................................................................. 10
2.3.1 Investment environment/climate .................................................................................................. 10
2.3.2 Types of investment vehicles/Avenues ........................................................................................ 11
2.3.3 Investment attributes ..................................................................................................................... 12
2.3.4 Investment decision making ........................................................................................................ 14
2.3.5 Investment management process ................................................................................................. 16
, PORTFOLIO AND INVESTMENT ANALYSIS
2.3 End of lecture activities ................................................................................................................... 19
2.4 Summary .......................................................................................................................................... 19
3.0 LECTURE 3: FINANCIAL MARKETS......................................................................................... 20
3.1 Introduction...................................................................................................................................... 20
3.2 Lecture objectives ............................................................................................................................ 20
3.3 Lecture outline ................................................................................................................................. 20
3.3.1 Economic functions of a financial market ..................................................................................... 20
3.3.2 Classifications of financial markets ............................................................................................... 21
3.3.3 Efficient market hypothesis (EMH) .............................................................................................. 23
3.4 End of lecture activities ................................................................................................................... 24
3.5 Summary .......................................................................................................................................... 25
4.0 LECTURE 4: PORTFOLIO THEORY ........................................................................................... 25
4.1 Introduction...................................................................................................................................... 25
4.2 Lecture objectives ............................................................................................................................ 25
4.3 Lecture outline ................................................................................................................................. 25
4.3.1 Business risk ................................................................................................................................. 26
4.3.2 Factors influencing the efficiency of a portfolio .......................................................................... 27
4.3.3 Principles of portfolio theory ........................................................................................................ 28
4.3.4 Limitations of portfolio theory ...................................................................................................... 29
4.4 End of lecture activities ................................................................................................................... 30
4.5 Summary .......................................................................................................................................... 30
5.0 LECTURE 5: QUANTITATIVE METHODS OF INVESTMENT ANALYSIS .......................... 30
5.1 Introduction...................................................................................................................................... 30
5.2 Lecture objectives ............................................................................................................................. 31
5.3 Lecture outline .................................................................................................................................. 31
5.3.1 Measures of individual investment return and risk....................................................................... 31
5.3.2 Measures of portfolio return and risk ........................................................................................... 31
3
, PORTFOLIO AND INVESTMENT ANALYSIS
5.4 End of lecture activity ...................................................................................................................... 42
5.5 Summary .......................................................................................................................................... 42
6.0 LECTURE 6: EFFICIENT SET AND CAPITAL MARKET LINE............................................... 43
6.1 Introduction....................................................................................................................................... 43
6.2 Lecture Objectives ........................................................................................................................... 43
6.3 Lecture outline .................................................................................................................................. 43
6.3.1 The Old school approach of designing a portfolio ........................................................................ 43
6.3.2 Portfolio separation theorem and the efficient frontier curve ........................................................ 43
6.3.3 Capital market line (CML) ............................................................................................................ 45
6.4 End of lecture activity ...................................................................................................................... 48
6.5 Summary ........................................................................................................................................... 50
7.0 LECTURE 7: THE CAPITAL ASSET PRICING MODEL (CAPM) ............................................ 50
7.1 Introduction....................................................................................................................................... 50
7.2 Lecture objectives ............................................................................................................................. 50
7.3 Lecture outline .................................................................................................................................. 51
7.3.1 Capital asset pricing model (CAPM)............................................................................................. 51
7.3.2 Assumptions of CAPM .................................................................................................................. 53
7.3.3 Applications of CAPM .................................................................................................................. 54
7.3.4 Applications of CAPM in investment decision making ................................................................ 56
7.3.5 Limitations of CAPM .................................................................................................................... 61
8.0 LECTURE 8: ARBITRAGE PRICING THEORY (APT) MODEL............................................... 63
8.1 Introduction....................................................................................................................................... 63
8.2 Lecture objectives ............................................................................................................................. 63
8.3 Lecture outline .................................................................................................................................. 63
8.3.1 Arbitrage pricing theory model ..................................................................................................... 64
8.3.2 Assumptions of APT Model .......................................................................................................... 64
4
, PORTFOLIO AND INVESTMENT ANALYSIS
8.3.3 Applications of APT Model........................................................................................................... 64
8.3.4 Limitations of APT model ............................................................................................................. 66
8.3.5 Differences between CAPM and APT model ................................................................................ 66
8.4 End of lecture activity ....................................................................................................................... 67
8.5 Summary ........................................................................................................................................... 67
9.0 LECTURE 9: MEASURES OF PORTFOLIO PERFORMANCE ................................................. 67
9.1 Introduction....................................................................................................................................... 67
9.2 Lecture objectives ............................................................................................................................. 67
9.3 Lecture outline .................................................................................................................................. 68
9.3.1 Treynors measure of portfolio performance (Tj) ........................................................................... 68
9.3.2 Sharpes measure of portfolio performance (Sj) ............................................................................. 69
9.3.3 Jensens measure of portfolio performance ( ) ............................................................................. 69
9.4 End of lecture activity ....................................................................................................................... 72
10.0 LECTURE 10: VALUATION OF FINANCIAL OPTIONS ........................................................ 73
10.1 Introduction..................................................................................................................................... 73
10.2 Lecture objectives ........................................................................................................................... 73
10.3 Lecture outline ................................................................................................................................ 73
10.3.1 Categories of financial options .................................................................................................... 74
10.3.2 Types of financial options ........................................................................................................... 74
10.3.3 Factors affecting call options ....................................................................................................... 76
10.3.4 Factors affecting put options ....................................................................................................... 76
10.3.5 Black and schools option valuation model .................................................................................. 76
10.3.6 Limitations of the black and schools option valuation model ..................................................... 79
10.4 End of lecture activity..................................................................................................................... 80
10.5 Summary ......................................................................................................................................... 80
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